Searching For The Magic Number

One plus the interest rate (stated as a decimal) divided by the number of times interest is compounded by year to the power of the number of times the interest rate is compounded by year times the number of years. All multiplied by the amount of the principle.

Huh?

Where:

A = final amount

P = principal amount (initial investment)

r = annual nominal interest rate (as a decimal, not in percentage)

n = number of times the interest is compounded per year

t = number of years

Huh?

This is what has been swirling in my head for weeks now. The calculation that tells how much money deposited today will be worth in t number of years.

Of course it’s all hedging isn’t it?

We’re assuming we won’t save another dime once we leave Canada. That probably won’t happen. We have no idea when we’ll have to stop working, or what working will look like between now and then. We can’t predict when either one of us will die or how many years we’ll have to finance between retiring and dying. I don’t even want to talk about dying. We don’t know how much money we’ll spend per month once we stop working so we can’t calculate how much we’ll need. We don’t know what interest rates will do. Or the stock market.

If you ask the ‘experts’ they all say you need 80% of your current income in retirement. But my current income supports me quite nicely here in the Western world. In an expensive part of the Western world. What if I lived somewhere else? Thailand, Columbia, Chile, Saskatchewan, Nova Scotia, Belize. What would that look like?

Then I start thinking that it’s doable. That our savings could grow to be enough to support us in a modest retirement. That it’s likely that we would still be able to save once we leave Canada. That we won’t get paralyzed by fear and stay here because it’s easy.

That’s my biggest fear. Bigger than that we won’t have enough money. My biggest fear is that we won’t go because we can’t see a clear path to the end. And then I realize that I can’t see a clear path to the end from right here. Staying here is no guarantee that it all works out. The only guarantee then is that I haven’t done what I wanted to do.

I’ve been peppering friends and acquaintances with the ‘how much do you think is enough to retire?’ question.

The answers are varied. Some will disclose a number. One million dollars is a popular sum. Others try to suggest some formula outlining how much they think they will spend per month times the number of years between retirement and death. Many duck the question being either uncomfortable with the question or not wanting to disclose their own finances. What is with our culture and its inability to be transparent with finances?

So, we came up with a number. Based on what we think monthly expenses might be ($4000/month), when we think we’ll ‘retire’ (let’s say 65 years old), and taking a wild guess at when we’ll die (I don’t know but we don’t seem to live terribly long in my family…80?).

$720,000

Based on our pension plan contributions so far it’s likely we’ll have a pension income of about $1500/month between the two of us. That’s a yearly income of $18,000 over 15 years is $270,000. So we only have to have $450,000 saved by the time we’re 65.

Hmmm. That’s still a big number. But here’s where that calculation at the top comes in. I’ve worked it nine ways to Sunday and have just about got myself convinced that if we save $200,000 before we leave at a rate of 4% interest over the 20 years until we’re 65 then we’ll have almost $450,000 in the bank.

And then it just comes down to how long it will take to save $200,000. Well $125,000 as we already have about $75,000 saved.

Two years? Three years? Four years?

It’s maddening. Do we really need that much? Do we really need to wait that long?

My next steps are to connect with people who have made the leap. How are they managing this question? Is it blind faith that it will all be okay? Trust that it will work out? Do they have a plan? Have they saved? What’s their number? Is my number too big? Too small? Does it all differ depending on how old you are now?

For once in life, the math is probably the easiest part of the whole thing. It’s what goes on inside my head that drives me crazy.

I would really love to hear what you think. I put the numbers out there in the spirit of transparency and because I’m looking for advice. Are you saving madly for retirement? Are you a traveler or expat who has faced the same questions? What’s your number?

**********

One way to prepare for a trip away is to try the foods of the countries you will be visiting. We’ve been slurping ramen noodles and enjoying sushi in preparation for our upcoming trip to Japan. If I lived in Perth I might try this Japanese restaurant for a tast of the fine dining aspects of Japanese cuisine.

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11 thoughts on “Searching For The Magic Number”

My magic number is probably a minimum of 2k/month, ideally sustainable (ie, not eating into a ‘principal’ of any sort. That’s enough to live comfortably in Thailand on a retirement visa with enough left over for unexpected costs, occasional flights elsewhere, etc. A better number would be $3k.

I suspect that my thinking is a bit different to yours, though – ‘retirement’ isn’t really on my agenda. I don’t really want to stop doing things that generate a little income and keep my brain active until I physically can’t do them any longer, so for me I’m hoping that a buffer of $100-$250k is sufficient. If I end up with more, great. If not, so be it. I have the lower range of that already sitting in a bank account, and add to it as I can.

Do I have certainty? Hell no. We never do no matter what path we choose. For me, though, the idea of working away in a cubicle for the next 40 years to save that million-plus retirement fund is a form of slow death, so I’m trying something different.Dave recently posted..The Friday Photo #102 – Bleached logs, Vancouver Island

I think I’m getting caught up in the N.American definition of ‘retirement’, you’re right. I do think that I will work in some fashion until I can’t any longer and that does mean that the number could be a lot smaller that estimated. I am looking for certainty aren’t I? I know, in reality, it doesn’t exist. I read somewhere (a while ago) that change will happen when the pain of making the change finally becomes less than the pain of staying. One day (soon I hope) the pain of not knowing the outcome will be less than the pain of staying here…and of we’ll go. Thanks for the insight Dave.Gillian recently posted..Searching For The Magic Number

It really does depend where you end up – I would think that $4,000 is a pretty comfortable number (could probably do with less). A lot of it will also depend on if you have property at retirement as well – if you are living in your own place, your expenses will be a lot less! Or you could housesit through your retirement! :)

I have to say that Pete and I are fortunate in this regard. We did all the right things when we made good salaries and saved a lot. But I’ve gotten many emails from readers wondering the same thing – worrying about retirement being the one thing holding them back. I’d have to say that even if we didn’t save like good little corporate monkeys, we still would have gotten on that first plane and not worried about. We absolutely had no other choice. :)Dalene recently posted..Hidden Treasure

No, we won’t have any property so will pay for housing throughout. We are smart renters though and believe that the financial difference between owning a house (and all its costs) and renting (one easy payment) should be invested. In the end I think it evens out (if you’re okay with not owning a home – which we totally are). House-sitting is a great option!

Believe me we are saving like good little corporate monkeys! As I said above, we will continue until, for us, we have no other choice but to go.

As a lifelong freelance writer with a daughter to care for, I’ve never known the luxury of having a financial cushion. So, while I find posts like this intriguing, I can’t really relate. I also know quite a few people who watched their 401ks dwindle to a pittance during the latest financial crisis. For me, there is no such thing as retirement– I’ll be working until the day I die– but fortunately I love what I do and have no urge to stop doing it.Bret @ Green Global Travel recently posted..GO GREEN TIP #89: Eco-Friendly Gardening For Spring

People like you fill my mind Bret. It is a luxury that I can even think about saving this much and/or even retiring! I realize that a good portion of people just keep on keeping on and manage on what they have. And yes, I also realize that a good chunk of people lived their working lives saving away only to see it lost in the market tumble. There really is no certainty is there? Thanks for weighing in.Gillian recently posted..Monday Moment: Bia Hoi Shop, Hanoi, Vietnam

I have to say that I haven’t thought too much about retirement – we have some ideas and investments, but no real plan. My grandmother always tells me that you need a LOT to retire, which is pretty scary. I guess we’ll start thinking about it more in our 40s – at the moment I feel too young and fancy free =)Andrea recently posted..How To Explore Vienna Without Bus And Umbrella

That’s the thing, Andrea, we ARE in our 40s – I’m 44…although I don’t feel it or act like it! Luckily we’re in a position to be able to sock a chunk away now but sometimes I feel like the clocks a-ticking!!Gillian recently posted..Searching For The Magic Number

I’m horrible about this stuff. I worked for 9 years after college and before I quit to move to Germany. In that time, I think I had a 401(k) going for about 3 years, which dwindled after the market went to crap a few years ago. I ended up getting a tiny pay-out from it before I moved. I might be taking the “close my eyes and pretend the problem doesn’t exist” approach.Ali recently posted..Melbourne in 10 Days – How Much I Spent

This is something that is high on my agenda as well as a late 40’s wanna-be long-term traveller. I’m working towards some long-term slow travel starting next year (after doing various trips of 6-weeks to 6-months over the last few years). I am fortunate enough to have a house nearly paid off (goal #1) which will allow me to start stashing away significant savings over the next year if I can stick it out at work for a bit longer. I’m also fortunate that I’m in a well-paid job which has put me in this position. My primary goal is to get to a certain amount of savings in the bank (ie capital) that won’t be touched while I’m away. I will have several strategies to sustain my travels over a few years:

->> Rent the house out. Rental income will pay house-related expenses and support a majority of my travel expenses. With a bit of luck/planning there will also be some left over to add to the banked capital. It also means I have a home to come back to if/when I decide that I’ve had enough of roving around. This is extremely important to me.

->> Save on accom where travelling where possible by house-sitting, medium-term apartments and using websites like http://www.workaway.info/ to find suitable places to stay for a few months free accom in return for work. (Ideas taken on board by other bloggers such as yourself).

->> Look at some work that I can do to earn as I go. This is the part that I’m not sure about yet. I don’t think I’m keen on the full-on travel blogging that so many do nor the stock-standard ‘teach English’ routine. I will investigate what work opportunities may exist through various freelancing websites. Also, I am hopeful that I may be able to do some contract work for my current employer (software documentation, system testing, etc) on an ad hoc basis. I’m still pondering and researching my opportunities as far as this goes!

I do wonder about those that choose to travel long-term without any thought as to what they are going to do when they have had enough of that lifestyle. I like knowing that I have the security of a home to return to one day – a home that will continue to increase in value and provide an income in the meanwhile.

My one suggestion to you would be to at least consider doing what I have done and investing some or all of your savings into a house and renting it out as well. You’d have to crunch the numbers to make sure that the rental income would cover ALL house-related expenses (rates/taxes, mortgage, insurance, property management fees, maintenance), make sure you buy well in an area that will hold its value long term and will be desirable to renters. It doesn’t have to be a home that you would want to return to; you could always sell it then use the funds to buy a house for yourself if/when you finally settle down. (Caveat: I’m in NZ and don’t really know anything about the North American housing market so you’d have to do your research as to whether or not this is a smart move!)